How a Cash Reserve Can Make You Money

For the first ten years of my adult life (18 to 28), I lived like most Americans: paycheck to paycheck. Every time I got paid, I would send out checks to bill collectors until my account balance was hovering within a few dollars of zero. I never had anything in my savings account because I thought it was more important to pay my bills.

To make matters worse, I did the same thing with my credit cards. I borrowed on all of my available credit until I was within a few dollars of my limit.

My thinking was: “This money isn’t doing me any good just sitting in my account. I might as well put it to use.” It sounded perfectly logical to me at the time.

I spent a lot of time making spreadsheets and budgets with elaborate plans on how I was going to get out of debt, but my debt load just kept increasing. I thought I was pretty smart, but in reality my plans were failing miserably.

Cashflow 101

Then, about five years ago, I ran across the book Rich Dad Poor Dad by Robert Kiyosaki. I fell in love with the ideas in the book and took it a step further by purchasing a Monopoly-like game to accompany it called Cashflow 101.

I played the game as much as I could, bugging everyone around me to sit through the 2-4 hour games in which we would randomly draw a profession and compete against each other to get out of the “rat race.” After playing a dozen or so times, I started to get the hang of it.

In the game, if you land on certain squares you get to choose a card that might offer you a “deal.” At first, I would buy every deal that presented itself to me, but that wasn’t winning the game for me.

A Reflection of Life

Kiyosaki says that the way you play Cashflow 101 is a reflection of how you handle money in real life, and he’s right. I was depleting my bank account to zero in the game, just like I was doing in life.

The reason I wasn’t winning was simple. The game is won by doing “big deals” and I never had the cash on hand to buy a “big deal.” My cash was always tied up in too many little deals.

A Ha!

When I figured out how to win at Cashflow 101, it was like a light went off in my head. I had figured something out about how to manage money!

I immediately opened a savings account and starting to build a reserve fund even though I still had bills to pay. This went against the logic I had operated on for ten years, but I reminded myself that the logic I was using wasn’t getting me anywhere.

Turning Point

That moment proved to be a turning point in my financial life. The fact that I had a reserve fund gave me the confidence I needed to cut up my credit cards. My lifestyle was basically the same, but my debt was getting smaller.

I started dating my current girlfriend at right about the same time. It seemed that my newfound financial confidence had spilled over into my love life.

We attacked the debt together and paid off about $20,000 over the course of 18 months.

Real Life Deals

Now that our debt was paid off, and we had a reserve, I started looking for real life deals. I ran across the best deal I’ve made yet and was able to pounce on it because I had the cash on hand.

From a strictly logical standpoint, it shouldn’t make a difference whether you keep $1000 in the bank or not. Money is still coming in and going out at the same rate. Your expenses are no different, and neither is your income. In fact, it seems more logical to take the $1000 and throw it at a credit card to save in interest charges.

From my experience, what seems logical is not always the best course of action. Having a cash reserve can make you money in the long run for these reasons:

1. No Need for Credit Cards

What’s the number one excuse for carrying a credit card? How about, “I keep it in case of emergencies.” The funny thing about emergencies is that they always seem to happen.

It’s time we accepted the fact that emergencies are going to happen and plan for them. If you have $1000 in the bank, you’re covered.

Getting rid of your credit cards will make you more money than you realize. If you still think you need a credit card, this article will rebut all your other excuses.

2. Confidence

Having a safety blanket has an enormously powerful effect, one that purely logical thinkers tend to ignore. There are no solid numbers that can be attached to confidence, but having it tends to attract money to you.

I don’t know if the effect is spiritual, psychological, biological, or economical; I just know it exists. A person who walks outside of fear is more receptive to opportunities, more attractive to employers, and more trusted by clients.

The minute I started putting money away, I started to see a corresponding change in my luck.

3. Discounts

Back when I was living paycheck to paycheck, I never had money for those annoying irregular expenses like plane tickets, gifts, or car repairs. I tended to wait until the last minute and just buy whatever I could get. As a result, I tended to pay the highest rates on the market.

If I would have had a cash reserve, I could have kept my eye out for deals on plane tickets months in advance, I could have taken my time to buy more appropriate gifts at more reasonable prices, and I could have taken my car in for preventative maintenance before it broke down.

4. Freedom from Employers

Most people stay in jobs where they are overworked and underpaid because they are terrified of losing their paycheck. This is a terrible way to live.

If you carried a cash reserve (especially if it were big enough to live on for 3-6 months), you would have a certain amount of freedom at your job. You wouldn’t let your boss push you around because you wouldn’t be afraid to quit.

5. Ability to Make Deals

The most valuable quality of a cash reserve is the ability it gives you to take advantage of a deal when it presents itself. Big money deals don’t last for long. Most people will never be able to jump on such a deal because they will never have the cash reserves on hand.

Let’s say your neighbor abruptly gets an amazing job offer out-of-state. He will be making twice the money, but he only has a week to start a new life and has to get rid of his house quickly. Since he will be making great money and he doesn’t want to hassle with the burden of selling his house long-distance, he makes you one hell of an offer.

He knows that you are the type of person who is looking for deals so he says that he’s willing to sell his house to you for 30% below market value. If you don’t take the offer, he’ll enlist a real estate agent with instructions to sell it quickly at 24% below market (plus a 6% realtor fee). It doesn’t make a difference to him who buys it, but he’s giving you first dibs because you’re a friend.

You know that it will sell within days of being listed at that price. You have one week to come up with the money to buy it. If you had some cash reserves, you could buy the property and immediately re-list it at proper value. Since you aren’t going anywhere, you could wait for a few months until you got your price.

Assuming that the house is worth $300k and you bought it for $210k, you stand to make $90,000 in a matter of months just because you had a few thousand dollars on hand to make the down payment. If you were living paycheck to paycheck, you’d never have the chance.

How to Start a Cash Reserve

In order to build a cash reserve, you have to make it a priority. You have to put it above almost everything, including some of your payments. Once it’s in place, you have to resist the temptation to dip into it frivolously.

What’s Your Rush?

We are always in such a hurry to do everything. Realize that you can wait for the month or two it will take to get an extra $1000 in your bank account.

I like to imagine how I would have done things differently from the beginning. I was in such a rush to get out of my house that I never took the financial precautions that would have saved me thousands over the long run.

What if I had just stayed with my parents for the first month out of college? That would have easily allowed me to put away $1000 for a cash reserve.

That cash reserve would have allowed me to stay away from credit cards and start investing earlier. This chain of events starting with one month would have eventually saved me the five years it took to reverse the effects of credit card debt.

Cut off your cable for a few months, don’t go out to eat, live minimally until you have a cash reserve. Then, just like in Cashflow 101, you can start flipping that money into bigger and bigger deals.

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